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Date: 2019-03-26 Page is: DBtxt001.php L0700-TVM-NQ-Valuing-the-Future


TRUE VALUE METRICS
NUMBERING / QUANTIFICATION

VALUING THE FUTURE


Discounting the Future
Discounting the Future

Most everyone in finance understands the concept of discounting the future ... but in most cases the understanding may not be very deep.

Using a discouunting calculation to compute the Net Present Value of a company based on future profits is a reasonable thing to do. The present value of a potential profit many years in the future may reasonably be discounted to some quite small figure because the future is unpredictable and the right number is arguable quite small.

But for many other events that are going to occur in the future, this simple discounting process is just plain wrong.
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The True Cost of the Future
Earthquakes

There are a number of places where earthquakes happen from time to time. The Pacific rim is one such area from South America all the way to Indonesia. Earthquakes can be rather modest tremors that merely shake a bit and do little real damage to absolutely catastrophic events with massive destruction and loss of life. These big events happen less frequently than the small tremors. It is more than 100 years since a very big earthquake struck California, but history suggests that there will be another one at some time ... maybe soon, maybe not. Based on history, there will be another big earthquake in California and the damage and loss of life is likely to be astronomical.

How should this be 'numbered'. What preparations should be in place. Costing this type of event using a process of conventional financial discounting is clearly not appropriate.

Extreme Weather Events

The inconvenient truth is that extreme weather events are becoming more frequent and more intense as a result of climate change. The same old same old thinking about the weather is not going to work as extreme weather events put human life at higher and higher risk and do more and more damage to buildings and infrastructure.

The social and economic costs of these events is huge ... and rapidly growing.




The text being discussed is available at


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